Shawn Khorrami outlines 5 common mistakes when seeking a business loan

Launching a successful business is synonymous with the entrepreneurs dream. But hard work alone does not always lead to success.

Starting a business comes with substantial risk. Realistically, about 90 percent of new startups need to obtain loans to get off the ground. However, many would-be entrepreneurs find themselves unprepared to tackle the challenge of breaking into the marketplace.

Successful entrepreneur Shawn Khorrami, of Khorrami Consulting, notes that it is crucial for new entrepreneurs to understand the risk of starting a business, and to prepare to expect the unexpected. The following is a list of five common mistakes that entrepreneurs make when starting their first business.

Build a business plan

Far too often, hopeful entrepreneurs start with a great idea but find themselves unable to launch a business the right way. One of the most important aspects of securing funding for a new company is to have a comprehensive business plan to present to financiers or banks.

The business plan should name all key personnel (and their qualifications), pro forma statements (projected sales and costs), production of products/services, distribution of products/services, marketing plan, and company structure. The goal is to record all crucial aspects of the business.

A strategic business plan helps the business owner get their “ducks in a row. It also eliminates naivety and covers projected financials. The financial statements (pro forma statements) are the most important part of the business plan. A well thought out plan should give the business owner a better understanding as to whether they need a loan or investor funding and how much they will need.

Lastly, the business plan is a precursor to establishing all necessary legal contracts with potential partners, affiliates, and investors. Business owners should get comfortable with legal contracts, even if most of the partners are family and friends. Ambiguity between business partners is the leading cause of conflict in a business. It is, therefore, best to get specific with everyone’s expectations before launching the business.

Know ALL of your costs

There will always be “hidden” costs with loans and operating costs. To the extent possible, business owners should try to understand the full scope of costs behind a business loan (interest rate, service fees, closing costs, etc.). However, it may not be until the business is operating before some of those costs are fully realized or understood.

In the early stages of the business, the owner should carefully comb through bank statements and note every expense, likelihood of recurring, and whether each expense is necessary. After noting all costs, the owner should update his/her cash flow statement. Knowing sooner rather than later allows the business owner time to adjust their efforts. Shawn Khorrami frequently coaches his clients to carefully examine every business expense.

Maintain a mix of inbound and outbound sales

Some businesses try to gain new customers by sitting back and waiting for them to walk in the door. They build a nice website, spend money on digital marketing, and then they get frustrated when no customers show up. This is a purely inbound approach.

Other businesses take the outbound approach. They knock on doors, network, and direct sell every customer. This is a great approach to take in the early months of the business, but if this is the only approach to sales, then the business owner and their staff will burnout quickly.

Most businesses need both inbound and outbound sales. Websites and investment in SEO are great, and the business phone will start ringing with new customers so long as there are also sales efforts “out in the field.” The two work together for a great mix of bringing in new customers as well as retaining older customers.

Understand break-even principles

The break-even analysis helps business owners know exactly how many sales dollars they need in order to know whether they are making or losing money. Here is a guide to the break-even calculator. Every business owner should learn how to use one and apply it to their business because a break-even analysis helps to refine your business’ budget.

Value cash flow over bank accounts

Many business owners simply look to see if they have money in the business bank account. That’s how they judge the level of their success. But all too often, those owners find themselves struggling to keep up financially.They will feel caught off guard with rising costs during certain seasons of the business.

The alternative is to focus on cash flow. As stated above, knowing all costs will help the cash flow statement stay up to date. It will also help the owner know whether to shop for lower-cost providers and increase their marketing and sales efforts.

Shawn Khorrami is a serial entrepreneur based in Encino, California. He has successfully managed businesses in a wide array of industries, including law, property management, hospitality, and more. As founder of Khorrami Consulting, Shawn offers some of the most potent, in-depth consulting approaches of anyone in the country.